Coca Cola 2007 Annual Report Download - page 95

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THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
to the derivative instruments. These agreements allow for the net settlement of assets and liabilities arising from
different transactions with the same counterparty. Based on these factors, we consider the risk of counterparty default
to be minimal.
Interest Rate Management
Our Company monitors our mix of fixed-rate and variable-rate debt as well as our mix of short-term debt versus
long-term debt. This monitoring includes a review of business and other financial risks. From time to time, in
anticipation of future debt issuances, we may manage our risk to interest rate fluctuations through the use of derivative
financial instruments. The Company had no outstanding interest rate swaps or other related derivative financial
instruments as of December 31, 2007 and 2006. Any ineffective portion, which was not significant in 2007, 2006 or
2005, of these instruments was immediately recognized in net income.
Foreign Currency Management
The purpose of our foreign currency hedging activities is to reduce the risk that our eventual U.S. dollar net cash
inflows resulting from sales outside the United States will be adversely affected by changes in foreign currency
exchange rates.
We enter into forward exchange contracts and purchase foreign currency options (principally euro and Japanese
yen) and collars to hedge certain portions of forecasted cash flows denominated in foreign currencies. The effective
portion of the changes in fair value for these contracts, which have been designated as cash flow hedges, was reported
in AOCI and reclassified into earnings in the same financial statement line item and in the same period or periods
during which the hedged transaction affects earnings. Any ineffective portion, which was not significant in 2007, 2006
or 2005, of the change in the fair value of these instruments was immediately recognized in net income.
Additionally, the Company enters into forward exchange contracts that are effective economic hedges and are not
designated as hedging instruments under SFAS No. 133. These instruments are used to offset the earnings impact
relating to the variability in foreign currency exchange rates on certain monetary assets and liabilities denominated in
nonfunctional currencies. Changes in the fair value of these instruments are immediately recognized in earnings in the
line item other income (loss)—net in our consolidated statements of income to offset the effect of remeasurement of the
monetary assets and liabilities.
The Company also enters into forward exchange contracts to hedge its net investment position in certain major
currencies. Under SFAS No. 133, changes in the fair value of these instruments are recognized in foreign currency
translation adjustment, a component of AOCI, to offset the change in the value of the net investment being hedged. For
the years ended December 31, 2007, 2006 and 2005, we recorded net gain (loss) in foreign currency translation
adjustment related to those instruments of approximately $(7) million, $3 million and $(40) million, respectively.
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